While the patent case between Apple (NASDAQ:AAPL) and Samsung (OTC:SSNLF) is being fought out in courtrooms, another confrontation of sorts is brewing in the market place. Whereas Apple is trying to reduce its dependence on Samsung (despite the courtroom battle, both have a foundry relationship), Samsung's $111 million investment for a 3% stake in Sharp (OTCPK:SHCAY) has the potential of making things all the more harder for Apple.
The Latest in the Courtroom Battle
Nokia (NYSE:NOK) filed a brief with the U.S. Court of Appeals on March 4, 2013, supporting Apple's patent case against the Korean company. The Finnish company believes that Judge Koh erred in denying Apple's plea for a permanent injunction against certain Samsung products. Just to refresh memories, while denying Apple's request for an injunction, Judge Koh had ruled that for a permanent injunction, Apple will have to establish a connection between its patented feature and demand for its phones; she also cut damages awarded to Apple by $450 million - $450,514,650, to be precise - citing two errors in damage calculations.
Apple's Dependence on Samsung
Top chip maker Intel (NASDAQ:INTC) is opening up to contract manufacturing and struck a deal to manufacture chips designed by Altera (NASDAQ:ALTR). This has led to speculation that the day may not be far off when we see Intel inside the iPhone and iPad. According to RBC analyst Doug Freedman, Apple may be thinking about getting its self-designed ARM chips manufactured by Intel. Apple already has an ongoing relationship with Intel as it uses Intel processors in Mac. If it comes true, this could end Apple's manufacturing relationship with archrival Samsung.
However, Samsung's investment in Sharp is a signal that things might be moving in an opposite direction on the supply of LCD panels to Apple. The Korean company has said that it will not be interfering in how the Japanese company goes about managing its business and the investment is only to ensure a "steady" supply of LCD display panels for its smartphones and tablets. However, it will probably also get a first look into and may influence development of Sharp's new products and also get access to Sharp's technology.
This is bad news for Apple because according to analysts, Apple sources almost one-third of its requirement of LCD panels from Sharp. Samsung's investment can potentially have long-term implications for Apple if Sharp chooses to favor its largest overseas shareholder or if Samsung tries to indirectly influence Sharp's decision making processes.
Samsung's Android Worries
It is not as if only Apple has problems. Samsung won the battle for market share in the smartphone market for sure, riding on the shoulders of Google (NASDAQ:GOOG). In 2011, Apple and Samsung were running neck-to-neck but after those 215.8 million product units shipped last year, Samsung's market share stands at 39.6% in the global market for smartphones. Apple, on the other hand shipped 136.8 million iPhones, representing 25.1% market share. Despite the long-winded discussion of market share versus revenue, this seems to be a slow war of attrition in which market share wins in the end.
Most of Samsung's smartphones have been Androids. Samsung increased its share in Android-based phones to 40.2% with Huawei Technologies Co. a poor second with a 6.6% share. Samsung's rising dominance in the Android market, however, has become a source of worry for Google.
Will Samsung and Google fight over using Android?
According to an article in the Wall Street Journal, a tension is developing in the Google-Samsung partnership on Android. With more than 40% share in Android phones, Google is worried that Samsung may want a bigger share in its mobile ad revenues. Google officials feel that they can keep Samsung's leverage in check only by providing competition -- from the likes of HTC (OTC:HTCCY) and hopefully from Hewlett-Packard Co. (NYSE:HPQ).
Google was probably sensing such a situation and did not wait for legitimate competition to emerge on its own. In May 2012, it went ahead and acquired Motorola Mobility Holdings whose product portfolio includes mobile devices, including smartphones and media tablets, wireless accessories, set-top boxes and video distribution systems, and broadband access infrastructure products and associated customer premises equipment.
What happens if Google does not give in?
It depends largely on how far Samsung will push Google. If Google refuses, Samsung could go it alone with Tizen 2.0, a Linux-based open-source operating system designed for smartphones, tablets, smart TVs and in-car systems. Tizen is governed by a steering committee headed by Samsung and Intel. Tizen is Samsung's hedge against Google's Android, which although an open-source comes with certain conditions. With Tizen expected to hit the market in July/August 2013, Samsung would have no such problems.
Pricewise, both Android and Tizen based smartphones are likely to be in the same range. Samsung is reportedly launching its first Tizen-based smartphone through the Japanese carrier NTT Docomo this year, followed by Orange, Europe's wireless carrier. According to the same report, Vodafone (NASDAQ:VOD) and France Telecom (FTE) are the other two carriers interested in Tizen.
Samsung and the other companies involved with Tizen see it as a potential alternative as both open source Android and the closed iOS are getting too powerful for comfort. Tizen's source code and SDK were released recently and it appears that it is "laggy, malformed software with no design aesthetic." If Samsung forks Android and chooses to compete with it, it will have to go all out and put its full weight behind Tizen if it has to retain its leadership position in the smartphone market.
On the other hand, Google has insurance by way of its ownership of Motorola Mobility. It would actually boil down to a battle between brands. Both Samsung and Android are powerful brands with Android at a disadvantage being an open source offering albeit with restrictions imposed. Google needs to retain the primacy of its operating system for maintaining its mobile ad revenues and may have to think more seriously about Motorola and enter the smartphone market in a big way.
There is, however, no official word as representatives of both companies refused to comment, which is easily explained. For the time being, Samsung has a lot on its mind over the launch of Galaxy S IV, which supposedly has software that will outweigh the hardware. The phone features Eye scrolling software, which will automatically reveal the next paragraph as the reader's eyes reach the bottom of the page. It is not official as yet and will be known, only if at all, at a press conference to be held later this month.
What is sure is that Samsung has applied for a trademark for "Eye Scroll" in Europe this January and "Samsung Eye Scroll" in the U.S. A sneak preview of Galaxy S IV's features is available here.
Samsung seems to be having everything going its way. Samsung's strategy seems to be to use its marketing clout and cash to build new relationships to ensure its primacy in the smartphone market. Apple on the other hand believes that there is no better friend than cash in hand.
Whereas both Samsung and Google are trading at or near their 52-week highs, Apple has lost almost 19% in one year. Without prejudice to Apple's financials and its cash hoard and impressive profits, the performance of its stock has been more sentiment driven rather than anything else. Apple will have to come up with an extremely innovative new offering if it there has to be an encore of iPhone 5.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.